Sunday, October 20, 2013

I am so glad these people exist...

I am sitting on the train from Washington to New York near a prosperous attorney. He has been to the land of lawyers (DC).

On the return trip he looks at prices for a bunch of high beta stocks starting with Bidu. When he finds out I am a stockpicker by career he asks me what I like. I give him a boring looking name (a super conservative blue chip) and he asks me how much it is up year to date. I don't know.

It turns out he picks everything off the charts and he is puzzled that I don't. Indeed he knows no other way of doing it.

He has only been at it a few years and his results are great. He doesn't think Bidu is high risk.

17 comments:

Anonymous
said...

Indeed, I always loved it how most of any stock pitch, presentation and road show are from 2/3 to 9/10 big nice historical data, and the "past performance is not indicative of future results" line is usually good to test one's printer resolution, because if it's not high enough it won't even be readable in print ;)

I've sometimes felt the fact that I don't immediately know how much something is up or the latest price or exactly what I paid when means I must be a terrible investor, and I'm not focused enough, even though I've generally done OK. So it makes my day to hear you say you don't know how much something is up.

"[He] poured his life savings -- $30,000 -- into Tesla Motors (TSLA) stock, then trading at about $32 per share. When the stock hit $115 this July, he dumped all his shares and invested in options on Tesla stock, which are high-risk bets on the stock's future performance."

""I have a high risk tolerance, but I don't think the stock is that risky," he said."

Is Baidu's business risky or the stock risky is a key question. IBM hints even less room for foreigners in China in broader IT, so no Google come back for sure. Baidu at $80 too much bearishness probably over $200 will be extremes of optimism. However in terms of business, I see more risk in a JC Penney than a Baidu and vice versus for the stocks, one business broken the other not and one stock up a lot the other down a lot. But I would always favour the business when looking long term at owning the stock, mobile was always going to make money, your FB long tells me you knew that. So you don't like Baidu because it has gone up a lot or? Are you still long FB? Tesla is stock I think that will struggle in decade to fit into today's valuations, Tesla is more risky as more competition e.g. BMW with iCars which can be owned at a fraction. Baidu competition Qihoo? Baidu the BMW and Qihoo the Tesla in this equation. Also Baidu’s options skew was a good hint it would want to follow Google Friday. I like to buy value but hope it becomes momentum, I owned Baidu at $90 (that was not a pretty chart) sold most at $145. I recently bought Apple which is very much ex momentum nowadays... the cashflow stream is fine... but here is hoping momentum comes backs. Momentum, learn to love it for what it is and be careful how you short it. I am still long momentum like Sina, DangDang, FB, and Japan (one big momo show) I have been long all from a value point which we left long ago. Markets are not efficient in the short to medium term but that is why investors have a job and that is what makes this fun. Hopefully the lawyers gets too greedy and gives back a little to Mr Market.

So true!! Performance can be measured looking backwards... risk essentially cannot. It is like washing your clothes in an African river every day. You can wash your clothes successfully every day without a clue of where the crocs are.One day, after 300 days doing it, you die! You can make money everyday but just need one day to go bust!

Some people say risk is volatility or something related to what they call beta. How can it be like that? If a new alcoholic CEO is appointed in a company and nobody knows it as it is his personal life, volatility and beta remain unchanged, yet I would say that the company is riskier. on the other hand, if a financial institution which owns 20% of the stake in a retailer decides to sell that stake because it simply needs cash, the volatility and the beta might have increased as a result of that operation. However, is the company riskier? I think it is not. The company risk remains unchanged. Indeed, investing is that company is less risky as you can buy the same company at a lower price and then with a higher margin of safety.

Some people define risk as the "possibility of permanent impairment of capital". I think that is a good definition but has more to do with the final outcome than with the process of understanding risk.

Risk is for me the degree of understanding of a business. What are your unknowns unknowns. We try to convert them first in Known unknowns reading more reports, talking with other people. Finally, we try to convert the known unknowns into known knowns. I think that is the way to reduce risk.

To sum up, I think the question to assess risk should not be oriented to "how many stocks do you have" but "what do you know about these stocks" which can turn to be sort of debate between specific and non specific risk. Owning just one stock in the portfolio is probably not advisable even if the degree conviction is high as we always can be wrong and the consequences would be fatal. However, owning hundreds of stocks is not advisable in my opinion either as: i) usually - not always, the correlation with the market is higher and "beta" risk increases and ii) it is difficult to have a good understanding of hundreds of companies.

Therefore, some kind of trade of beta-residual risk exist. I am an advocate of concentrated portfolios, especially for qualified investors who try to beat the market in the long-run. The thing is that in my opinion with 10-12 stocks the degree of diversification you get by adding additional stocks is tricky most of the times as you are probably reducing your level of knowledge about those companies (adding one company is more time and energy consuming than people might think)then increasing the company specific risk.

Rafa (Spanish), from London, recent London Business School Masters in Finance graduate. Nice to meet you all in this amazing blog! :)

Is Baidu's business risky or the stock risky is a key question. IBM hints even less room for foreigners in China in broader IT, so no Google come back for sure. Baidu at $80 too much bearishness probably over $200 will be extremes of optimism. However in terms of business, I see more risk in a JC Penney than a Baidu and vice versus for the stocks, one business broken the other not and one stock up a lot the other down a lot. But I would always favour the business when looking long term at owning the stock, mobile was always going to make money, your FB long tells me you knew that. So you don't like Baidu because it has gone up a lot or? Are you still long FB? Tesla is stock I think that will struggle in decade to fit into today's valuations, Tesla is more risky as more competition e.g. BMW with iCars which can be owned at a fraction. Baidu competition Qihoo? Baidu the BMW and Qihoo the Tesla in this equation. Also Baidu’s options skew was a good hint it would want to follow Google Friday. I like to buy value but hope it becomes momentum, I owned Baidu at $90 (that was not a pretty chart) sold most at $145. I recently bought Apple which is very much ex momentum nowadays... the cashflow stream is fine... but here is hoping momentum comes backs. Momentum, learn to love it for what it is and be careful how you short it. I am still long momentum like Sina, DangDang, FB, and Japan (one big momo show) I have been long all from a value point which we left long ago. Markets are not efficient in the short to medium term but that is why investors have a job and that is what makes this fun. Hopefully the lawyers gets too greedy and gives back a little to Mr Market.

- This is one of the finest comments on value versus momentum. Thanks.

for you to be surprised that there is one person out there who makes money from charting, is almost as arrogant as someone not believing that there is 'value' in fundamental analysis

I think you will probably find if you explore his risk management and trading strategies more deeply you will probably find similarities with you or other successful value investors... things like how to increase / decrease position sizes, when to take money of the table... these 'technical' trading factors are just as important as having the hypothesis correct in the first place.

Do you have specific dirt on BIDU or is this just a comment on a guy who doesn't know what he owns? I have talked to people who say Baidu has forced websites to pay for keywords or they push the free results out of search rankings; I sort of viewed this as a sign of strength although it also highlights the ethics of management. Wonder if you have something specific in mind or just a commentary on people who don't know how to invest?

I do not understand stock investment :) by training I am supposed too...I advise my friend to get ready to active trading in USTs (may be not cash USTs but futures despite basis risk) in preparation to the US "default"...that is real possibility due to working of our political system...

I made quite a lot from trading currencies...mostly USDJPY pair on carry trade...ironically I was on the plane to Tokyo going on business trip to help enhance our JGBs analytics platform at the time then 100 USDJPY level was severily broken and I got margin call...these psychological important levels have lots of barrier options written on and it leads to uncontrolled and automatic unwinding of hedges...

Then again, there are lots of 'professionals' out there who hug the index, making small tweaks (underweight or overweight) depending on momentum and/or broker tips. That seems fairly doltish behavious as far as I'm concerned. However, these 'professionals' have sharp suits and expensive haircuts, and they talk as if they were genuises. So, as a class, they are well paid, and some of them can do very well indeed. But where are the customers' yatchs?

On reflection, perhapsyour lawyer friend is not quite as stupid as I first thought.

For what is was worth I think the momentum in Apple has come back but I left now for NQ where I was bemused MW used Bronte's name to add weight to their poor research. Baidu looks set for $200 and Tesla pretty much topped out in Oct while BMW sits near record highs. JCP well lucky I stick to owning good businesses. Feels like we are due a left field event as never stays this easy for long.

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